1)I have been a growling, obnoxious, and highly unpopular bear on natural gas since I put out my sell recommendation on June 2 , just before the crash from $4.30 to $3.10. Since then it has been bouncing around like a ball bearing in a boxcar on the Durango & Silverton Railway. Devon Energy?s (DVN) CEO Larry Nichols has me wondering how long this exasperating action will continue, and when a recovery will begin, if ever. NG has been a screaming chart buy for months, but with terrible fundamentals. Thanks to advanced fracting technologies, hardly a week goes by without a major new find somewhere in North America, taking our reserves from nine years to 100 years in a New York minute.?? So the US is sitting on a gigantic untapped gas formation? Who knew? DVN, one of the best managed companies in the industry, has a balanced oil/gas portfolio. Fortunately, windfall profits in oil have offset wrenching losses in gas. By chopping NG exploration to nothing, it has halved its drilling budget, and that money has dropped straight to the bottom line, enabling it to announce great earnings. See my call to buy competitor Chesapeake Energy (CHK) before its unbelievable 250% run . Despite the prices not seen in a decade, gas demand from industry remains moribund. But Nichols thinks continued production cuts will bring the gas market into balance sometime this winter, making those charts a lot more interesting. Maybe you should be picking up some of the NG ETF (UNG) on its next dive down to $12.50.

2) Reformed oil man, repenting sinner, and borne again environmentalist T. Boone Pickens says that ?when we turn the US green, it will have the best economy ever.? I met the spry, homespun billionaire at San Francisco?s Mark Hopkins on a leg of his self financed national campaign to get America to kick its dangerous dependence on foreign oil imports. For the past 30 years, the US has had no energy policy because ?no one wanted to kick a sleeping dog.? Production at Mexico?s main Cantarell field is collapsing, and will force that country to become a net importer in five years. Venezuela is shifting its exports of its sulfur laden crude to China for political reasons, once refineries in the Middle Kingdom are completed to handle it. Unfortunately, the collapse of energy prices since June and the disappearance of credit have put urgent alternative energy development on a back burner, with his preferred natural gas (NG) taking the biggest hit. If the US doesn?t make the right investments now, our energy dependence will simply shift from one self interested foreign supplier (Saudi Arabia) to another (China). Wind and solar alone won?t work on still nights, and can?t power an 18 wheeler. Don?t count on the help of the big oil companies because they get 81% of their earnings from selling imported oil. The answer is in a diverse blend of multiple alternative energy supplies from American only sources.?? Although Boone now has Obama?s ear, it?s a long learning process. Boone has donated $700 million to charity, and says the 20,000 trees has planted should offset the carbon footprint of his Gulfstream V. I worked with Boone to organize financing for a Mesa Petroleum Pac Man oil company takeover in the early eighties, when it was cheaper to drill for oil on the floor of the New York Stock Exchange than in the field. Now 80, he has not slowed down a nanosecond.

3) President Obama has a tough hand to play here. If the economy stagnates, the 2010 midterm elections are going to be an uphill battle. Only 7.7% of his $787 billion package has been spent so far, and when the rest hits, it will be like pouring gasoline on the flames. On top of that, add the cost of the new health care plan, still an unknown, but big. Perhaps this is why gold is now taking its fifth run at $1,000 in the past year? If his gargantuan stimulus takes hold, then it?s off to the races with inflation. For more on this, read the piece by William Patalon III by clicking here .

QUOTE OF THE DAY

?If you want a friend in Washington, get a dog,? said Harry S. Truman, the 33rd president of the United States.

1) The chickens are finally coming home to roost for the dollar, which has gapped since Thursday from $1.40 down to $1.4450 against the euro, and done even worse again the Australian, Canadian, and New Zealand currencies. Crude traders tell me that the weak buck is making oil go up, while currency traders inform me that it is strong crude that is causing the dollar collapse. It?s like an Agatha Christie murder mystery where all of the suspects are guilty. If we are on the eve of an economic recovery, many fear that the US will return to its old, evil, high consuming, high importing ways, and that the trade deficit will skyrocket. If is doesn?t, then you can count on burgeoning government borrowing to knock the stuffing out of the greenback. It sounds like a heads I will, tails you lose bet. This is not exactly a new trend. The chart below shows the purchasing power of the dollar since the Revolutionary War, and it has been mostly downhill since 1929. No, I have not been trading the market that long. Better to take your pay in Euros, American double Eagle gold coins, bushels of wheat, or barrels of crude.

2) Legendary investor and former George Soros partner Jim Rogers gave a great interview to Bloomberg TV over the weekend. Although he is a long term bull on China, he wouldn?t be adding to positions here, because having doubled in six months you?d be jumping on a moving train. China?s stimulus program is 2.5 times larger than ours on a GDP basis, and is generating more immediate results, as it is being entirely domestically spent. No generous subsidies for foreign car imports. Many industries are booming, and real estate is going crazy again. The better play here is commodities, which the Chinese absolutely have to buy, especially the grains (see my call to buy wheat). Jim is so wedded to his China play that he has moved to Singapore to get closer to his investments. He has always been very public with his ideas, getting people to buy what he already owns, and widely propagates YouTube with his interviews. Take a look at his personal investment website at http://www.allthingsjimrogers.com/.

3) At the beginning of the year I was wildly bullish about junk bonds, and recommended a covey of ETF?s, including the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG) (see my report ).? At the time, fears about The End of The World triggered cascading margin calls and distress liquidation that saw tidal waves of paper dumped into a no bid market. Some lesser credits traded with yields at 2,500 basis points over Treasuries. JNK is now 54% up from the March lows, and the others have done as well. Once the Great Depression II was taken off the table, the scramble for yield by hedge funds couldn?t have been more awesome. The average spread over Treasuries has been cut from 1,800 basis points to a mere 1,000, which was where spreads maxed out in the 1990 and 2002 recessions, and could be the new ?normal.? This is against a 20 year average junk spread of 600 basis points, and only 100 basis points seen at the ultra frothy 2007 peak. The good news is that falling junk yields may eventually force tight fisted commercial banks to ease up on the supply of conventional loans, which is restraining a real economic recovery. Gains on junk from here may be limited. Emerging market corporate issuers inundated this market in Q2, some dubious borrowers are starting to sneak back in, and the rollover calendar going forward is truly enormous. There are too many better fish to fry. I?d take the money and run.

4) I have long advocated that the term ?BRIC? should be expanded to ?BRICK? with the inclusion of South Korea (maybe BRISK??) (see my last last report ). The Hermit Kingdom?s exporters are super competitive, with Hyundai forging ahead in terms of both market share and quality in the US. South Korea is carving out a quality niche, where China can?t compete. The Won is undervalued, unemployment is relatively low, and the economy is now poised for an early recovery. The iShares MSCI South Korea Index ETF (EWY) has soared by 115% this year, tacking on 30% in the last three weeks alone. Better add some kimchee and bulgolgi to your diet. They?re delicious, but don?t try it before a date if you?re hoping for a return engagement.

QUOTE OF THE DAY

?The Chinese consumer is consuming,? said legendary investor Jim Rogers, about the Middle Kingdom?s successful stimulus program.

1) I thought PIMCO co-CEO Mohamed El-Erian hit the nail on the head when he said that the July stock market rally was nothing more than a sugar high. Skyrocketing unemployment does not create new demand. We are going nowhere without a real housing recovery, which is impossible with gun shy lenders. What little improvement we are seeing in the economy stems from unsustainable government spending. If you think the last stimulus package was tough to get through congress, wait until the next one. With three quarters of Q2 earnings out now, it is clear that company managements panicked and shed staff like a fur coat in a New York summer. This produced a string of top line disappointments and bottom line surprises. Companies can?t continue this, unless they want to shrink themselves out of existence. They are gaining weight by eating their seed corn. I think that if you want to go long here you are risking 10-15% to make 2-4%. It doesn?t look like a good risk/reward ratio to me. I prefer the inverse. There?s no law that says you have to trade every day of the year, despite what the brokers say. Better to keep your powder dry here with the S&P 500 at 993, and watch the long players inevitably crash and burn.

2) Those whose bacon was saved by the Q2 doubling and tripling of bank share stocks, better not count on a repeat in Q3 and Q4. For a start, there isn?t going to be any more government issued adrenaline to ramp prices with TARP?s, TALF?s, ZIRP?s, stress tests, and forced takeovers. The next move in interest rates is going to be a flattening one, cutting into their now hugely profitable margins. Q2 earnings showed that the best performing banks made the largest portion from trading, likely an unrepeatable performance. There is room for only one Goldman Sachs (GS) in the world, maybe two, if you count Morgan Stanley (MS). Wasn?t this the well that poisoned so many of them in the first place? Dare I say that many banks are now overvalued? The quick fingered might even entertain a sector short here in the bank ETF (KBE). For an excellent separation of the wheat from the chaff, take a look at Martin Hutchinson?s work by clicking here .

3) It always irritates the hell out of me when those off Wall Street try to tell those of us on Wall Street how to pay ourselves, contract issues aside. The only reason Phibro?s Andrew Hall is owed $100 million is because he made $500 million for his beleaguered Citigroup (C) parent. C needs more traders like him, not fewer. A 20% performance bonus is the most common of hedge fund compensation arrangements. What Main Streeters don?t get is that in bad years you get paid zero, and in fact, get a due bill, if you throw in the overhead. If C shareholders don?t like the deal, they can hire the guy who is happy to work for 10%, or 5%, or the fixed salary of a postal worker, but they may not like the results. For more on this debate, look at Jason Simpkins piece by clicking here .

4)China is using the global collapse in asset prices to ramp up their acquisition of foreign companies?? by 13% this year, well up from 2008?s hefty $52 billion total.?? Enterprises like Sinopec, Beijing Automotive, and Haeir have been targeting companies like GM?s Hummer and Opel units, a Japanese department store, and Australian iron ore producer Rio Tinto.?? The goals are twofold: lock up long term supplies of natural resources and food, and access to advanced technology to enhance their competitive position in global markets. These are not small deals. A rumored bid for the largest oil producer in Argentina is thought to be around $14 billion. JP Morgan Chase and Morgan Stanley are making a killing on the fees. The great thing is that they don?t even need a credit card to pull this off. These are all cash deals, funded by the diversion of just a portion of China?s monthly US Treasury purchases. I remember the last foreign takeover binge, when it looked like Japan was going to buy the world. Remember Pebble Beach and Rockefeller Center? They ended up top ticking every market they touched. So sell away. Better to brush up on your Mandarin and start practicing with those chopsticks, because your next boss may come from the Middle Kingdom.

QUOTE OF THE DAY

?When I switched from the Democratic to the Republican parties, people called me a ?transvestocrat,? said Billy Tauzin, current lobbyist with the trade group Pharma, and former Cajun senator from Louisiana.

Note to Subscribers: The Diary of a Mad hedge Fund Trader will not be published on July 27, 28, and 29. It?s time to clear out the cobwebs and restore my animal spirits. These days will be added on to the end of your subscription period. I knew it was time to take a break when I put the Preparation-H on my tooth brush this morning.?? I am going to be researching hiking trails in California?s Big Sur, looking for rare birds, and practicing my fly cast for the next few days. Those still in need of investment advice can look for me at the third campsite on the left past, the showers. I?ll even put some hot chocolate on the fire for you if you bring your own steel cup.

1)There is no doubt that the next trade from here in stocks is a sell. Buying NASDAQ on a 12th consecutive up day, the S&P 500 on the back of a 110 point move,?? and the Dow on top of a 1,000 point pop is not what great fortunes are made of. After stopping out of my own shorts in the 880?s, I have been holding back, holding back, holding back. See my warning not to sell too soon . I have never been one to fight the tape. The only trader who is always right is Mr. Market. The earnings to support a full fledged bull market are not just there. Deleveraging worlds don?t support expanding earnings multiples. It all works for me because the more it goes up now, the bigger the fall later. Even the raging bulls are warning about a ?W? shaped recession and another market dive in 2010. How finely do you want to trade this thing? It?s clear the big core shorts at the major hedge funds haven?t budged, and that most of the recent low volume action has come from day traders, momentum players and CTA?s. All we need now is for mom and pop to come in and ring the bell at the top. Is 2009 going to be replay of 2008? Is a ?Sell in May and go Away? to be followed by another October crash? If your friends? long positions make money from here, just revel in their good fortune,?? and let them pick up the dinner check.

2) I am a huge long term bull on crude, and now that it is again threatening $70 it might be wise to look at more energy plays, especially since many analysts and companies still have their 2009 average prices pegged at $45. When a company like Diamond Offshore (DO) announced great Q2 earnings of $946 million, while Texas tea gyrates from $80 to $148 to $32, it piques my interest (check out the website at http://www.diamondoffshore.com/). Deep offshore is the marginal, high cost oil supply, and when crude runs, the operating leverage on companies in this area can be enormous. DO leases out 30 semisubmersables, 14 jack ups, and one drill ship, and has a $9 billion order backlog. Only the natural gas area continues depressed. It also has the additional benefit in that they are a major long term supplier to one of my favorite companies, the Brazilian oil exploration and production company, Petrobras (PBR). CEO Larry Dickerson says that even though US oil demand is weak, the long term needs of China and India will drive prices upward long term. It all sounds like music to my ears.

3) Japanese Prime Minister Taro Aso?s call for national elections on August 30 is setting up a potential ?black swan? type event. His Liberal Democratic Party (LDP) has ruled for all but 11 months of the past 55 years. But his party?s 18 year effort to spend itself out of an ?L? shaped recovery has failed miserably, succeeding only in converting Japan from the least, to the most indebted industrialized country.?? Think of a 1,000 ?bridges to nowhere.? Look at the 30 year round trip in Japanese real estate in the chart below. So the opposition Democratic Party of Japan (DPJ) has a real shot here, which has promised to fundamentally remake the economy by boosting social spending, canceling useless construction projects, and encouraging domestic consumption. Remember what a surprise Congress Party win did for India?s stock market? Look at the excellent piece from The Permanent Wealth Investor?s Martin Hutchinson?? for an analysis of how such an outcome could affect Japan on a stock by stock basis by clicking here.

4) The good news is that California has finally come to a budget compromise, covering a $26.3 billion shortfall with $8.8 billion in education cuts, $4.4 billion in forced borrowing from local governments, $2.2 billion in chopped social programs, $1.3 billion in unpaid furloughs of?? state employees, and $3.5 billion in accounting fudges. The bad news is that we are giving San Diego back to Mexico and San Francisco to China, who already own most of it anyway. As for me, I am going to spend the weekend putting iron bars up on my windows, installing a new burglar alarm system, and setting up booby traps. Part of the deal involves the release of 27,000 of the Golden State?s 155,000 prisoners. While 10,000 will be deported to Mexico, I?m sure the rest will be dumped in my front yard.

QUOTE OF THE DAY

?Daddy always wanted to be the bride at every wedding, and the corpse at every funeral,? said Alice Roosevelt Longworth about her father, Teddy Roosevelt, in an interview granted me during the seventies. The once beautiful and ever vivacious Alice mesmerized me with stories of her visit to China in the aftermath of the 1900 Boxer Rebellion and her audience with Japan?s Meiji emperor.

1) Let me tell you that I, and the rest of the hedge fund industry, are highly suspicious of the global stock market rally that has ensued over the past week. Companies lowered earnings expectations so far they were easy to beat, and could be achieved by laying off a few more workers. The question this raises is how the economy moves forward with skyrocketing unemployment. Now that we have double topped in the S&P 500 at 956, even the bulls are saying we only have another 4% to go. This on a day when we are all wondering if commercial real estate loans will be the stick that breaks the back of the banking industry. Mike Mayo, a banking analyst with Clayon Securities, says that the industry may have to write off a quarter of its $7 trillion loan book over the next three years, levels greater than seen during the Great Depression. While banks are making a lot of money trading, they are losing it even faster in loan losses. It's like trying to fill a barrel with water that has been perforated with a shotgun blast. If you are playing from the long side here, keep one foot in the exit, and a finger right on your mouse.

2) One can't help but be overwhelmed by a sense of history walking by the Las Vegas Strip's City Center; unquestionably one of the worst commercial real estate disasters ever. The glitzy, ultra modern, Cesar Pelli designed, 63 acre complex occupies the quarter mile between the Bellagio and the Monte Carlo Hotels and will become one of the wonders of the world if it is ever finished. Nearly completed are the Mandarin Oriental, Aria, Veer, Harmon, and Vdara Hotels, offering 4,000 rooms and 2,600 condos. They will be adorned by two casinos, a convention center, a new theater for the Cirque du Soleil, an enormous shopping mall, and parking for 7,500. The finished project will employ 12,000. But strikes and overruns sent costs soaring to $8.5 billion, and the project is now hopelessly behind schedule. I saw a total of one worker in a cherry picker working on the building with a screwdriver. The other guy going up in an elevator turned out to be a lender contemplating a jump off the top. Kirk Kerkorian wanted to build the ultimate Sin City destination resort when his MGM-Mirage partnered with Dubai World, years ago. The relationship has soured, with Dubai World filing suit against its partner for negligence and mismanagement, which it later withdrew. The bigger question is who is going to stay in these rooms? Those who financed trips to Las Vegas with home equity loans or subprime credit cards definitely are not coming back. If the project files for bankruptcy, it will leave a gigantic eyesore at the heart of the tourist area, and will become a monument to excess, in a city of excesses. Unfortunately, what happens in Vegas doesn't always stay in Vegas, as a financial collapse would send shivers through the industry globally.

3) I picked up a copy of Peter Schiff's latest book, The Little Book of Bull Moves in Bear Markets, which outlines his investment thesis for the next decade.?? First, let me tell you that I am really glad that I stocked up on 9 mm ammo and survival gear, the vegetable garden is well underway, and I already stored lots of canned food and fresh water because of the frequent earthquakes we have here in San Francisco. After all, a complete breakdown of civilization can happen at any time. I'm not so sure about the corn flake hoarding he suggested. Don't they go stale? I'm kind of old to learn a new language, but my son tells me that learning Mandarin is easy, if you already speak Japanese. These are the pearls of wisdom Peter bestowed upon readers to prepare for the coming economic and financial collapse, which will make the Sack of Rome look like a tea party. I was much more sympathetic to his investment strategy, which is similar to my own. A collapsing dollar, minimal GDP growth for a decade, and soaring commodity prices mean you should get all of your assets out of the US. American real estate in all its forms will be a black hole. Your available funds should be invested in the safe haven of foreign stock, bond, and currency ETF's, rounded out with healthy dollops of gold, silver, copper, and oil. Hyperinflation will be the order of the day. Retirees unable to live on fixed incomes will be forced to move to Costa Rica to make ends meet. Only a decade of frugal living, high savings, and small government will get the US out of this funk. We have been living beyond our means for decades, and it is now time to pay the piper. Peter wrote the book early in last year's presidential election, and he is positively apoplectic now that Obama is in the Oval Office. Make that two decades of ruin. For Peter's take on Obama's health care plan in all its eloquence, take a look at his Money Morning piece today . For those who are wholly invested in the US, the book is a refreshing splash of cold water on their faces.

QUOTE OF THE DAY

The guys who ran the trains didn't get to run the airlines. It just doesn't happen,' said Martin Wolff, a contributor to Vanity Fair, about the impossibility of newspapers moving to profitable online business models.